Government to boost Chinese property market

By Liu Shanshan (chinadaily.com.cn)

Facing a housing market lull which could drag China's economy further in the backdrop of a worldwide financial crisis, Beijing is probing possibilities to loosen its macro control to activate the real estate sector.

As many as 18 Chinese cities, including Shanghai,Guangzhou,Hangzhou and Xi'an, have announced detailed policies to boost their property market, which have seen at least four months of consecutive drops in housing prices.

Propelled by the local governments' measures, the central government is believed to be studying market trends. Analysts predict that Beijing is expected to jump on the bandwagon by rectifying its strict regulatory decrees of higher taxation, and removing draconian control on bank lending to anyone buying second homes.

Speaking on the sidelines of a press conference Thursday in Beijing, Du Ying, deputy minister of the National Development and Reform Commission, told reporters that the real estate industry, a major sector of China's fixed-asset investment, that a major drive behind the country's past rapid economic rise is declining, and the government is "closely watching developments".

Some Chinese economists caution that a worsening slump in the real estate market in China would not only undermine the healthy growth of the economy, but also put the country's financial system at risk.

The worsening financial crisis, now sweeping the world and hardening the lives of many, originated from the subprime debacle in mid 2007 in the United States. Because of the sudden bust of a 10-year American housing boom, a rocketing number of American homeowners were unable to pay mortgages, and the banks were troubled by mountain-high bad debts.

To prevent the same scenario from happening, the 18 Chinese cities have resorted to measures, including doling out subsidies to private homebuyers, unprecedented since former Prime Minister Zhu Rongji launched privatization policies of housing; cutting taxes on housing deeds, and even giving permanent urban residents permits to lure outside homebuyers, in Hangzhou's case.

Shanghairaised the mortgage ceiling of the housing accumulation fund by one-fifth, into which employees and employers deposit money every month in return for lower mortgage rates, a move expected to encourage city residents to apply for a larger housing loan.

Regulatory Macro Control

Like the United States and Europe,China also witnessed a sizzling real estate sector since 2000, led by Shanghai,Guangzhou, and other relatively developed coastal cities, that benefited from the reform and opening-up policies. Buoyed by increasing incomes, a rising number of well-off urban residents purchased their own homes, in addition to cars and other luxuries, and become China's middle-class.

However, the laissez-faire development of the property market has led to skyrocketing prices, which resulted in many grievances from homebuyers. At one time, the selling price of per square meter for a downtown Shanghai plush apartment was reported at more than 120,000 yuan (US$17.60). The housing price hikes also created run away inflation in 2007.

This led to Beijing putting on the brakes in August 2007 by introducing higher taxes on housing prices, collecting more fees, and imposing 110 percent mortgage rates on second apartments, effectively controlling hoarding and speculation. As a result, housing prices began to decline.

Waning Property Market

In Shenzhen, China's first special economic zone, housing prices have declined more than 40 percent from its peak last year. Sales in Beijing, Shanghai and all other major cities have reported a substantive drop.

Statistics released by the state media, Xinhua, show the housing sales volume in Beijing during the National Day holiday decreased by 72 percent, compared with the same period last year. This period is traditionally a sales peak time for real estate transactions. Despite the deep price cuts made by property developers, only 69 apartments on average were sold per day during that week.

As the backbone of China's state revenues, the weakening property demand may hit the country's public coffers and fiscal policies as well.

The fall in property sales market will lead to a reduced demand for construction materials like steel, cement and lumber, and at the same time trigger slumps in China's fixed-asset investment sector. Combined with a sharp drop in exports initiated by Wall Street's stock plunge and global financial turmoil, China may face big risks in a slowdown of GDP growth rates and even an economic downturn.

The sluggish property market has also sparked concerns over the country's capital safety, mainly from the banks. There are fears that domestic financial institutions may be caught in the same dilemma as their US counterparts, some of whom went belly up due to the subprime crisis.

Wait-and-see Homebuyers

The 18 Chinese cities used many measures to stimulate their real estate markets: extending the length of time homeowners can pay back mortgages, reducing property taxes of private house owners and canceling restrictions on buying a second home. These policies were a great impetus for Chinese salary earners who took out all their savings to buy a home a year ago, but in the current bleak housing market, more and more potential homebuyers would rather wait and see regardless of those favorable policies.

Many potential buyers believe there is still room for further price adjustments and think it is too risky to buy homes now, given the instability of the global economy. "I will not open my purse until April or May next year, when I believe housing prices may undergo a 30 percent drop," said a Beijing resident surnamed Yu, who wants to buy a home in the Chinese capital.